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IndirectTaxMeaningMeritsand
DemeritsofIndirectTaxes
Post:GauravAkrani.Date:12/30/2010.NoComments.Label:Economics.

WhataretheIndirectTaxes?Meaning

An indirect tax is one in which the burden can be shifted to others. The tax
payerisnotthetaxbearer.Theimpactandincidenceofindirecttaxesareon
differentpersons.Anindirecttaxisleviedonandcollectedfromapersonwho
manages to pass it on to some other person or persons on whom the real
burdenoftaxfalls.Fore.g.commoditytaxesorsalestax,exciseduty,custom
duties,etc.areindirecttaxes.

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MeritsandDemeritsofIndirectTaxes

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ImageCreditsScottSnider.

Hicks classifies direct & indirect taxes on the basis of administrative

arrangements.Incaseofdirecttaxthereisadirectrelationshipbetweenthe
taxpayerandtherevenueauthorities.Ataxcollectingagencydirectlycollects
thetaxfromthetaxpayers,whereasincaseofindirecttaxesthereisnodirect
relationship between the taxpayers and the revenue authorities. They are
collectedthroughtradersandmanufacturers.

OvertheyearstheshareofindirecttaxhasdeclinedinIndiaduetoreduction
intheratesofindirecttaxes.

Advantages/MeritsofIndirectTaxes

Themeritsofindirecttaxesarebrieflyexplainedasfollows:

1.Convenient

Indirecttaxesareimposedonproduction,saleandmovementsofgoodsand

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services.Theseareimposedonmanufacturers,sellersandtraders,buttheir

FEATURED

IndirectTax

burdenmaybeshiftedtoconsumersofgoodsandserviceswhoarethefinal
taxpayers.Suchtaxes,intheformofhigherprices,arepaidonlyonpurchase

BankLevy

of a commodity or the enjoyment of a service. So taxpayers do not feel the

burden of these taxes. Besides, money burden of indirect taxes is not
completely felt since the tax amount is actually hidden in the price of the
commoditybought.Theyarealsoconvenientbecausegenerallytheyarepaid
in small amounts and at intervals and are not in one lump sum. They are
convenientfromthepointofviewofthegovernmentalso,sincethetaxamount
iscollectedgenerallyasalumpsumfrommanufacturersortraders.

2.Difficulttoevade

Indirecttaxeshaveinbuiltsafeguardsagainsttaxevasion.Theindirecttaxes
are paid by customers, and the sellers have to collect it and remit it to the
Government. In the case of many products, the selling price is inclusive of
indirect taxes. Therefore, the customer has no option to evade the indirect
taxes.

3.WideCoverage

Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the
productsorservicesaresubjecttoindirecttaxes.Theconsumersorusersof
suchproductsandserviceshavetopaythem.

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4.Elastic

Some of the indirect taxes are elastic in nature. When government feels it
necessary to increase its revenues, it increases these taxes. In times of

MANAGEMENT

prosperityindirecttaxesproducehugerevenuestothegovernment.

5.Universality

Indirecttaxesarepaidbyallclassesofpeopleandsotheyarebroadbased.
Poor people may be out of the net of the income tax, but they pay indirect

ManagementFunctionsAnd
Process,ManagementThought
PlanningFirstPrimaryImportant
FunctionOfManagement
ManagementByObjectives
(MBO)PeterDruckerMBO

taxeswhilebuyinggoods.

DecisionMakingProcessIn
ManagementProblemSolving

6.InfluenceonPatternofProduction

Authority,Responsibilityand
AccountabilityInManagement

By imposing taxes on certain commodities or sectors, the government can

PrincipleofDelegationof
AuthorityImportanceofDelegation

achieve better allocation of resources. For e.g. By Imposing taxes on luxury

goods and making them more expensive, government can divert resources

OrganisationOrganizational
StructureOrganisationalChart

fromthesesectorstosectorproducingnecessarygoods.

DecentralisationAdvantages
andLimitationsofDecentralization

7.Maynotaffectmotivationtoworkandsave

The indirect taxes may not affect the motivation to work and to save. Since,

ManagerialLeadershipLeader
QualitiesLeadershipTheories

most of the indirect taxes are not progressive in nature, individuals may not

HumanResourceManagement
HumanResourceDevelopment

mind to pay them. In other words, indirect taxes are generally regressive in
nature.Therefore,individualswouldnotbedemotivatedtoworkandtosave,

MotivationMotivationalFactors
IncentivesTheoriesofMotivation

whichmayincreaseinvestment.

Maslow'sHierarchyofNeeds
TheTheoryofHumanMotivation

8.SocialWelfare

The indirect taxes promote social welfare. The amount collected by way of

FrederickHerzberg'sTwoFactor
TheoryMotivationHygiene
Factors

taxes is utilized by the government for social welfare activities, including

education,healthandfamilywelfare.Secondly,veryhightaxesareimposed

DouglasMcGregor'sTheoryX
andTheoryYEmployee
Motivation

ontheconsumptionofharmfulproductssuchasalcoholicproducts,tobacco
products,andsuchotherproducts.Soitisnotonlytochecktheirconsumption
butalsoenablesthestatetocollectsubstantialrevenueinthismanner.

DavidMcClelland'sAchievement
Motivation,ManifestNeedTheory

9.FlexibilityandBuoyancy

MarketingMixand4P'sofThe
MarketingManagementArticle

Theindirecttaxesaremoreflexibleandbuoyant.Flexibilityistheabilityofthe
taxsystemtogenerateproportionatelyhighertaxrevenuewithachangeintax
base, and buoyancy is a wider concept, as it involves the ability of the tax
system to generate proportionately higher tax revenue with a change in tax

5m'sofadvertisingand
advantagesofadvertising

base,aswellastaxrates.

NEWARTICLES
Disadvantages/DemeritsofIndirectTaxes

WhatisMarketSegmentation?
ImportanceInModernMarketing

QualityControlTotalQuality
ManagementTQMQualityCircles

Although indirect taxes have become quite popular in both developed &

ImportanceofMarketing
ResearchtoGovernment

Underdevelopedcountriesalike,theysufferfromvariousdemerits,ofwhich
thefollowingareimportant.

Fayol'sPrincipleofDivisionof
WorkMeaning,Example,
Explanation

Indirecttaxfailstosatisfytheprincipleofeconomy.Thegovernmenthastoset

PrinciplesofGoodLayoutforan
AdvertisementCopy

up elaborate machinery to administer indirect taxes. Therefore, cost of tax

BasicAssumptionsofLawof
Demand

1.HighCostofCollection

collectionperunitofrevenueraisedisgenerallyhigherinthecaseofmostof
theindirecttaxes.

2.Increaseincomeinequalities

FINANCE

Generally,theindirecttaxesareregressiveinnature.Therichandthepoor

WhatisFinance?Meaning
DefinitionFeaturesofFinance

have to pay the same rate of indirect taxes on certain commodities of mass
consumption.Thismayfurtherincreaseincomedisparitiesamongtherichand
thepoor.

WhatisFinancialPlanning?
MeaningTypesofFinancialPlans

WhatisFinancialManagement?
MeaningDefinitionScopeArticles

3.AffectsConsumption

Indirecttaxesaffectsconsumptionofcertainproducts.Forinstance,ahighrate

WhatisCorporateFinance?
MeaningWhatitIncludes?

ofdutyoncertainproductssuchasconsumerdurablesmayrestricttheuseof
such products. Consumers belonging to the middle class group may delay
their purchases, or they may not buy at all. The reduction in consumption
affects the investment and production activities, which in turn hampers

BANKING

economicgrowth.

WhatisaBank?Introduction,
DefinitionandFeaturesofBank

Indirecttaxesdonotcreateanysocialconsciousnessasthetaxpayersdonot

DifferentTypesofBanksWhat
areVariousKindsofBanks?

4.LackofSocialConsciousness
feeltheburdenofthetaxestheypay.

5.Uncertainty

Indirect taxes are often rather uncertain. Taxes on commodities with elastic
demandareparticularlyuncertain,sincequantitydemandedwillgreatlyaffect

CommercialBanksDefinitions,
PrimarySecondaryFunctions
BalanceSheetofCommercial
BankLiabilitiesandAssets
HowtoOpenBankAccount?7
StepsToOpenBankAccount

aspricesgoupduetotheimpositionoftax.Infactahigherrateoftaxona
particularcommoditymaynotbringinmorerevenue.

WhataretheAdvantagesof
OpeningBankAccount?

SavingAccountBankMeaning,
FeaturesandAdvantagesofIt

The indirect taxes are inflationary in nature. The tax charged on goods and

FixedDepositAccountofBank
Meaning,Features,Advantages

6.Inflationary
servicesincreasetheirprices.Therefore,toreduceinflationarypressure,the
governmentmayreducethetaxrates,especially,onessentialitems.

WhatisCurrentBankAccount?
ItsFeaturesandAdvantages

7.Possibilityoftaxevasion

RecurringDepositAccountIn
BankMeaningandFeatures

Thereisapossibilityofevasionofindirecttaxesassomecustomersmaynot

WhatisaCheque?Definition
KindsandTypesofCheques

pay indirect taxes with the support of sellers. For instance, individuals may
purchase items without a bill, and therefore, may not pay Sales tax or VAT
(Value Added Tax), or may obtain the services without a bill, and therefore,

WhatareFeaturesofCheques?
MainCharacteristicsofChecks

mayevadetheservicetax.

WhatisCrossingofCheque?
DifferentTypesofCheckCrossing

AutomatedTellerMachine(ATM)
TheAdvantagesofATMMachine

Conclusion

Elaborateanalysisofmeritsanddemeritsofdirectandindirecttaxesmakesit
clearthatwhereasthedirecttaxesaregenerallyprogressive,andthenature
of most indirect taxes is regressive. The scope of raising revenue through
directtaxationishoweverlimitedandthereisnoescapefromindirecttaxation
in spite of attendant problems. There is common agreement amongst
economists that direct & indirect taxes are complementary and therefore in
anyrationaltaxstructurebothtypesoftaxesmustfindaplace.

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NationalisationofBanksinIndia
IntroductionObjectivesDemerits
NarasimhamCommitteeReportI
1991II1998Recommendations
NewEconomicReformsofthe
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andDemeritsof
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BetweenDirect
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IndirectTaxMeaningMeritsandDemeritsofIndirectTaxes

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